Need to be aware of the negative connotations surrounding penny stocks

Some of the greatest companies started out very small, with their stocks valued at less than five dollars per share. In other words, they started out as what the investment world calls “penny stocks.” As those businesses grew in size, many of their shareholders grew in wealth along with the companies.

Few paths to significant and rapid wealth creation are as effective as investing in the right kinds of low-priced penny stocks. Excellent companies, regardless of their size, will always be able to provide their shareholders with impressive investment gains.

With increased opportunity, though, you have increased risks. Many people have been stung by those risks, and subsequently penny stocks have gotten a bad name in some investment circles. In almost all situations in which investors lost money, however, they could have easily avoided the downside if they had only followed the tips and suggestions in this book.

By showing you how to sidestep the risks, I clear the way for investors like you to profit from high-quality penny stocks. I help you find companies that have low debt loads, strong management teams, expanding market share, growing revenues, and game-changing intellectual property.

Penny stocks are shares of companies that trade at low prices — typically anywhere from one cent to five dollars per share. The low-priced shares are usually associated with very small companies that are just getting started. When the companies grow, the value of their shares increases, making money for anyone who owns the stock.

I just described the upside of trading in penny stocks, and it’s this potential for making money that explains the growing popularity of this type of investment vehicle. Of course, not all small companies thrive or even stay in business — which brings me to the downside of penny stocks: Should the company shrink, or run into any number of other problems that I describe later in this chapter, stockholder shares will decrease in value, leaving investors with a loss.

Many investors are drawn to penny stocks because they find the upside compelling. They’re intrigued by the idea of investing in a tiny company in its early stages and watching that money grow along with the company. After all, many companies that started out as penny stocks have gone on to become household names, making their early investors very wealthy in the process. Few other investment vehicles offer the possibility of turning a small amount of cash into a small fortune without even having to work at the company or break a sweat.

To succeed as a penny stock investor, you need to be able to maximize the upside (making money), while minimizing the downside (losing money). Unfortunately, far too many investors treat penny stock trading more like a get-rich-quick scheme or a trip to the casino than they do a legitimate investment strategy. But as I explain in this website, there is a right way to trade penny stocks and a wrong way. Said more directly, there is a profitable way and a costly way. In this website I give you all the information and tools you need to avoid the downside, while benefiting from owning small shares that have the potential to grow exponentially.

The first step to reaping the rewards of penny stock investing is to understand the basics, and the process of gaining that knowledge begins in this website. I begin by separating fact from fiction, exposing the truth about penny stocks and letting you know which rumors and innuendos have some basis in reality (spoiler alert: A lot of the negative things that you may have heard about penny stocks are actually true). I also offer a clear definition of penny stocks and fill you in on the ways that they’re unique investment vehicles.

Companies usually need to raise money to operate, and the most common way to generate that cash is for them to sell shares of their corporation on the stock market. If they need more money at a later time, they can issue even more shares . The company gets money to operate; in exchange, the shareholders get part or all of the company.

The shareholders will see the value of their investment in the company change based on what the share price does. If the company does well and grows, the shares typically increase in value. But if the business shrinks or runs into detrimental issues such as weak sales numbers, lawsuits, or new competitors, its shares will likely decrease in value.

Although the aim for most companies is to get bigger and bigger, the majority of them start out very small, with only a handful of employees or a total company value of a couple million dollars or less. Their shares may trade for a few dollars or even pennies. However, those penny stocks may become worth much more if the companies grow. If everything goes according to plan, the stock won’t actually be a “penny” stock for long, and both the value of the shares and your investment in them will be dramatically higher.

A lot of quality companies trade as penny stocks and many of these will perform very well for their investors. Of course, because share price is a reflection of perceived value, many downright awful companies with no prospects, or even on the verge of bankruptcy, trade as penny stocks as well.

Unfortunately, the number of low-quality companies outweighs the good ones. In fact, only 5 percent of penny stocks I review pass my analysis. Combined with the propensity for promoters and shady characters to provide misleading information (more on the shadowy side in a bit), penny stocks have earned a bad name.

Some of the negative connotations surrounding penny stocks suggest that they are

Hard to buy and sell:This is true for lightly traded shares on many of the penny stock markets. You won’t have this problem if you stick to shares trading on the better stock exchanges

Subject to scams:Unfortunately, penny stocks are the focus of many scam artists because of the opportunity to make money by manipulating the prices of the underlying shares. Dishonest promoters try to push up the prices of the penny stocks they own by tricking unsuspecting investors through free newsletters and message boards.

Based on low-quality companies:The majority of penny stock companies are not strong — and that’s putting it kindly. The key is to avoid those lackluster stocks and instead find the top 5 percent that will be extremely profitable.

Very volatile:Penny stocks are volatile, but that’s part of their appeal. Although such volatility isn’t appropriate for everyone, low-priced shares can move quickly and significantly, which can generate profit potential that isn’t available elsewhere.

You need to be aware of the negative connotations surrounding penny stocks. That awareness, combined with appropriate knowledge, will enable you to sidestep the dangers while remaining open to all the opportunities that low-priced shares can provide.